New tax rules will make it possible for workers to buy a type of annuity often called longevity insurance inside their retirement plans. The annuity aims to protect people from exhausting their savings in their later years.
Longevity insurance is a deferred-income annuity in which a person pays a lump-sum premium to an insurer in exchange for a guaranteed lifetime income stream that begins several years later, perhaps into the person's 70s or 80s. Until now, these annuities could not be widely used in 401(k) retirement plans and individual retirement accounts because those plans require account holders to begin withdrawals — known as required minimum distributions — at age 701/2.
But the Treasury Department announced this week that workers can now satisfy those rules if they use a portion of their retirement money to buy the annuities and begin collecting the income by age 85. The move is part of the Obama administration's broader effort to develop ways to provide Americans with more security in retirement.
"As boomers approach retirement and life expectancies increase, longevity income annuities can be an important option to help Americans plan for retirement and ensure they have a regular stream of income for as long as they can live," said J. Mark Iwry, the Treasury's deputy assistant secretary for retirement and health policy. The new rules take effect immediately.
To avoid the distribution rules, however, retirement plan participants can use either no more than 25 percent of their total account balances or $125,000 — whichever is less — to buy the annuity. (The maximum dollar amount will be adjusted for cost-of-living increases over time.)
The annuities must also be relatively basic and not larded with many of the special features — such as cash surrender options — that insurers sell in the commercial market. But annuity providers will be permitted to sell a feature that guarantees that the annuity owner's beneficiaries will receive the premium amount originally paid, minus any payments already made.